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Saturday, December 27, 2008

Are Workers Unwilling to Work?

Inventory to Sales Ratio

I am going to go out on a limb and assume this is the result of unintended inventory accumulation rather than, say, firms building up inventories in anticipation of an economic boom that is just around the corner. If so, then this is not a good omen for labor demand.

Why is the word demand highlighted? The graph is mostly an excuse to note this from Brad Delong:

Casey Mulligan says--wait for it--that the reason that unemployment is the 7% it is right now rather than the 4.4% it was two years ago because workers today face "financial incentives that encourage them not to work":

Are Employers Unwilling to Hire, or Are Some Workers Unwilling to Work?: Employment has been falling over the past year... if total hours worked had continued the upward trend they had been on in the years before the recession, they would be 4.7 percent higher than they are now.... [Today s]ome employees face financial incentives that encourage them not to work.... [T]he decreased employment is explained more by reductions in the supply of labor (the willingness of people to work) and less by the demand for labor (the number of workers that employers need to hire)...

pgl adds:

Believe it or not this explanation made it in print:

Because productivity has been rising ... the decreased employment is explained more by reductions in the supply of labor (the willingness of people to work) and less by the demand for labor (the number of workers that employers need to hire).

As pgl notes, Casey Mulligan doesn't tell us why labor supply suddenly shifted inward, he promises that will be divulged later, but he does have a solution to the unemployment problem. He calls for--wait for it--tax cuts:

Why would some people have fewer incentives to take a job in 2008 than they did in 2006 and 2007 (and employers fewer incentives to create jobs)? I will tackle that question in my next post, but even without a specific answer we learn a lot about today’s recession from the conclusion that labor supply – not labor demand – should be blamed. First of all, it suggests that a fundamental solution to the recession would encourage labor supply (perhaps cutting personal income tax rates, so people can keep more of their wages), rather than tinker with demand.

Tax cuts could also work by increasing the demand for goods and services and hence the demand for labor, but this is a supply-side explanation where workers refuse to work at the wages being offered to them and decide to stay home instead, so that is not the mechanism he has in mind.

Dean Baker isn't buying the labor supply explanation. As he notes, a key component of this explanation is the claim by Mulligan that, "Unlike in the severe recessions of the 1930s and early 1980s, productivity has been rising." But why has productivity been rising relative to previous recessions? Dean Baker explains:

The one piece of data that drives this story is the apparent strength of productivity growth in this downturn relative to prior ones. But, there is a real simple story that can explain this pattern.

If we assume that in prior downturns firms were reluctant to lay off workers, both because of union contracts and also because they recognized the cost of turnover and hiring new workers, then we would expect sharp downturns in productivity growth as soon as there is a downturn in demand.

Now, imagine that firms are not constrained by union contracts and don't worry about long-term costs, so that they quickly layoff workers when there is a falloff in demand. Voila! productivity does not fall off in the same way in this downturn.

That would be my story. We can try to do some more careful examination of declines in productivity sector by sector, but I suspect that this is what explains the difference in productivity patterns across downturns.

Whatever the explanation - and productivity is not easy to measure so the relationships in the data can be questioned - I find it highly implausible that worker's unwillingness to accept the jobs being offered to them is the source of the current employment problem.

    Posted by on Saturday, December 27, 2008 at 02:34 PM in Economics | Permalink  TrackBack (0)  Comments (64)


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